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Underlying Factors and Policy Interventions
Figure 2.19 Côte d’Ivoire: Fixed Assets per Worker, by Manufacturer Size Group, 2003–14
xed assets per worker (2010 US$) Fi 16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0 2003 2004 2005
2006 2007 2008 2009 2010 2011 2012 2013 2014 20 workers or less 101–500 workers More than 500 workers 21–100 workers All
Source: Abreha et al. 2019.
Underlying Factors and Policy Interventions
The underlying factors notwithstanding, the broader policy implication of the concentration of job growth in new and young firms is that public interventions for job growth should avoid size-based support schemes. Therefore, two sets of public interventions for promoting manufacturing job growth can be implemented—those directed at lowering barriers to entry and those promoting within-firm productivity growth.
Distinguishing between the two types of interventions is important because, on the one hand, policies aimed at lowering entry barriers lead to job growth only because entry boosts aggregate productivity by inducing the reallocation of market share from less productive incumbents to more productive entrants. On the other hand, although the second set of interventions raises industrywide productivity via reallocation of market share from less productive incumbents to more productive ones, it also leads to within-firm productivity growth among incumbents and entrants.
Policy Interventions for Lowering Entry Barriers
Arguably, the most formidable bottleneck to raising rates of entry into existing and new manufacturing industries in economies like those of Côte d’Ivoire and Ethiopia is physical infrastructure for essential services, including transport and logistics, information and communication technology,
and power and other utilities. Policy interventions aimed at reducing other barriers to entry by addressing infrastructure and services bottlenecks can be grouped into four broad categories, namely, business licensing and business regulation, access to external finance, trade policy, and labor market regulation. Business Licensing and Business Regulation Administrative and regulatory barriers to entry include all legal restrictions on the location, timing, scale, or type of production activities and related transactions, which are typically codified in explicit requirements for licenses and permits that businesses must acquire to operate. The cost of securing the licenses and permits would be negligible relative to the scale of activities of large companies in a developed economy. However, it can be quite sizable for the average small business in a developing economy.13
Empirical estimates suggest that license fees average 32 percent of annual output per worker in developing economies (Barseghyan and DiCecio 2011) and are reliable proxies for cross-country differences in the average cost of entry. Cross-country differences in the cost of entry are also associated with corresponding differences in the rates of entry. In turn, cross-country differences in rates of business entry lead to corresponding differences in the misallocation of factors of production and, consequently, productivity. On the basis of estimates, countries in the lowest decile of the average cost of entry per firm would have 32 to 45 percent higher total factor productivity and 52 to 75 percent higher labor productivity than countries in the top decile of the distribution of the cost of entry (Barseghyan and DiCecio 2011). Access to External Finance The rate of entry also depends on the ease of access to external finance. The existing evidence shows that interfirm differences in access to finance lead to distortions in the scale and interindustry patterns of entry that result in huge losses in aggregate productivity (Buera, Kaboski, and Shin 2011; Jeong and Townsend 2007). However, this finding may not hold if more productive firms tend to be less constrained financially than less productive ones (Midrigan and Xu 2010). In that case, more productive firms would tend to invest more without necessarily borrowing more given that their investments tend to be internally financed.
Moreover, the greater contribution of new and younger establishments to job growth suggests that new and younger firms tend to be more responsive to new investment opportunities compared with well-established firms (Adelino, Ma, and Robinson 2014). Supporting evidence suggests that new firms are more likely than older firms to respond to changes in local economic conditions, with the responsiveness of the new being higher where firms have easier access to external finance (Adelino, Ma, and Robinson 2014).
Trade Policy Initial exposure to foreign trade allows domestic firms to enter industries to which they would not have access otherwise because such exposure opens export markets for products for which domestic demand may be limited or absent. Over time, continued exposure to trade boosts the aggregate productivity of domestic producers in import-competing industries because import competition forces less productive domestic firms to exit those industries, while export markets allow the more productive domestic firms to increase production and employment.14 Therefore, the boost to job and output growth via trade occurs only among the more productive domestic firms in each industry to the extent that they export. Whether the number of jobs and domestic output will be higher than they were before exposure to trade depends on the balance between job losses due to trade-induced exit of domestic firms and job gains due to trade-induced new entry.
Labor Market Regulation An economy’s comparative advantage, which is determined by cross-country differences in production technology or relative factor endowments, is an important determinant of which industries or sectors would experience net job growth or net job losses caused by greater exposure to trade. However, crosscountry patterns of comparative advantage in trade also depend on international differences in labor market regulation or flexibility (Cunat and Melitz 2011). Countries that have “more flexible” labor markets generally tend to have a comparative advantage in industries facing greater uncertainty in market demand or production outcomes. As a consequence, countries that have less flexible labor markets end up specializing in more capital-intensive industries if they are characterized by lower within-industry uncertainty.
Labor market policies can influence within-firm productivity to the extent that they influence human capital formation through schooling and other skillsdevelopment schemes. Other interventions for promoting within-firm productivity growth may be aimed at one or both of two areas of policy—trade policy and the provision of infrastructure and incentives for innovation and technology adoption.
Trade Policy The boost that trade exposure gives to the aggregate productivity of domestic firms via trade-induced reallocation toward more efficient firms does not necessarily improve the productive efficiency of individual firms. Nevertheless, trade can raise productivity at the firm level through three channels: (1) through the
